Stocks are higher this morning as earnings continue to come in and the situation in Iran remains uncertain. Bonds and MBS are down small.
Kevin Warsh appeared in the Senate for his confirmation hearing and stressed that he will lead an independent Fed. Senator Elizabeth Warren tore into him over financial disclosures and tried to goad him into criticizing Trump. She demanded that Warsh discuss some area where he differed with Trump and Warsh replied with some anecdote about his looks, batting the question harmlessly away. Warsh has a high net worth, with a sizeable investment portfolio in hedge funds etc and has promised to divest it all if he gets the job.
When asked about the president wanting to see interest rate cuts, Warsh said that every President wants interest rate cuts. Trump is more vocal about it, which is the only difference. That is a fair point. It is kind of surreal seeing Democrats pretending to be inflationary hawks advocating for higher rates. When asked if rate cuts were a litmus test for his nomination he said “the president never asked me to commit to interest rate cuts at any particular meeting over the period of my tenure at the Fed. He didn’t ask for it. He didn’t demand it. He didn’t require it, and nor would I have ever done so.”
The markets didn’t have much reaction to the hearing, with the 10 year going nowhere and the Fed Funds futures still seeing a roughly 2/3 chance of no change in interest rates for the remainder of the year.
Homebuilder D.R. Horton reported better-than-expected earnings yesterday sending the stock up 6% in the aftermarket. That said, earnings per share did decline about 13% to $2.24. The company is sitting on inventory and plans to continue to work it down.
“Affordability constraints and cautious consumer sentiment continue to impact new home demand; however, our tenured operators executed with discipline, driving an 11% year‑over‑year increase in net sales orders, while reducing unsold completed homes by 35% from a year ago. We expect our sales incentives to remain elevated in fiscal 2026, with incentive levels dependent on demand, mortgage interest rates and other market conditions.” In other words, D.R. Horton will continue to use price cuts to move the merchandise. The company said on the call that roughly 10% of revenues were incentives, and they are using mortgage rate buydowns to improve affordability.
Gross margins came in at 20.1% which is on the low side. Margins benefited from a 50 basis point litigation gain, which means they were even worse. The company generated $3.7 billion in cash from operations and used $4 billion in dividends and buybacks. The company cited that construction costs are falling, driven by lower materials prices. So whatever tariff effects that may have been feared are not evident. Q1 last year was pre-tariff, so this is an honest comparison. Lower margins are being driven by price cuts, not costs. Lot price appreciation is moderating as well. Finally, labor tightness is improving, and the company said on the call that it is “consistent and plentiful.”
On the build-for-rent business, which is being targeted by the housing bill, the company continues to sell properties and the business is more or less on hold for the time being. On the market overall: “I think we’re seeing good demand in Texas, consistent as well in Florida. The markets feel pretty good to us. Generally, across the country, I would say that most of our markets are performing well in line with expectations, perhaps a little bit of softness in a few of our markets that have a kind of a traditionally heavy exposure to the software industry. That buyer sentiment may be off a bit. Other than that, just kind of a good start to spring, pretty encouraged.”
Interesting about Texas and Florida which suffered the most from overbuilding during the pandemic era. The worst may be over there.
Western Alliance reported better-than-expected numbers yesterday with a 7.9% decrease in earnings per share driven by the final write-down for the Leucadia Asset Management loan. Net interest margin increased, driven by lower deposit costs.
On the conference call, the company discussed the mortgage business:
The combination of these emerging tailwinds favor a more robust revenue environment for mortgage and MSR-related income even as we continue to operate with a conservative forecast…We are constructive on the mortgage business, as I said, as we begin 2026. And we see several tailwinds that could provide additional alpha earnings to our 2026 projections. As a starting point, we are assuming a 10% year-over-year increase in total mortgage fee-related revenues. However, if several of the administrations make housing affordable programs take hold, combined with favorable regulatory changes and a lower interest rate environment, we think AmeriHome could outperform these projections. As a data point and it’s an early data point, so I caution everyone on this.
But as a data point, entering the year here, we expect Q1 total mortgage revenues to be nearly equal Q4 results, but I’ll tell you that January’s volumes and margins as of close of business last night, we’re presently trending above our planning assumptions. So a little conservative on the mortgage income. It’s based on some tailwinds, which we think are going to come. We’ll wait. Those happen to be whether or not there’s access to 401(k) funds or the GSEs buying $200 billion more of mortgage bonds. We also see certain areas of the United States seeing supply exceed demand.
So we think some housing pricing may come down and certainly in the Southeast and we expect a couple of rate cuts certainly with potentially a more sympathetic Fed chair in May. So with all that going on, I think that’s the economic and administration tailwinds that we have. There’s also a couple of regulatory tailwinds and we’re going to wait to see what happens here but it’s our understanding coming out of Q1 that the FRB may give us additional guidance on MSRs. And the two things that we’re looking at is, one, will the FRB reexamine the MSR 25% cap to CET1 capital?
And if they do that, that will allow us to either hold on to — that will allow us to hold on to more MSR receivables and those have a double-digit yield to them. And so we like that. On the other hand, there’s another consideration, which is the change the risk weighting of the asset — of the MSR asset, which you know is 2.5x to 1.
If that comes down, that will either free us up to hold on to more MSRs or it could allow us to buy back more stock or support more growth to the first question today that we received or we just want to go to capital and we build a higher capital base. So we have some things going on here that potentially could be very strong as it relates to the mortgage business. So a little wait and see, but we have some optimism and trying to restrain it, but I’m hoping that it does come to fruition.
Those comments should put some spring in the step of mortgage bankers after a dour few years.
Mortgage applications rose 7.9% last week as purchases increased 10% and refis rose 6%. “Mortgage rates declined last week as financial markets responded positively to the Middle East ceasefire and the lower trend in oil prices, with the 30-year fixed rate decreasing to 6.35%,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Refinance application volume increased by 6%, while purchase application volume increased an even stronger 10%and was up 14% compared to last year’s pace. This increase was led by conventional purchase loans up 11% over the week. Despite the geopolitical uncertainty, housing demand is being supported by a still resilient job market, and homebuyers are experiencing a buyer’s market in most of the country given the higher levels of inventory relative to last year.”
